Coronavirus: force majeure, frustration and illegality

April 8, 2020

By Tom Longstaff, Joel Finnan and Duncan Hedar 

Summary

Since the emergence of the novel coronavirus and its related disease, COVID-19, in late-2019, its spread around the World has been rapid and the social and economic consequences that have followed profound and unprecedented.

Whole sectors of the global economy have largely ceased functioning with many western stock markets sent into freefall.

Given the scale of the economic trauma and commercial uncertainty caused by COVID-19, many organisations are re-examining their contractual relationships, seeking to understand the impact of coronavirus related legislation and social conditions on them. They are also considering how to address those commercial contracts which are now difficult or uneconomic to perform, illegal or redundant, or how to deal with a request by a party to rescind or relax performance of the contract.

In the circumstances, the concepts of force majeure, frustration and illegality, each of which provide for the suspension or abrogation of contractual rights and obligations in extreme or unforeseen circumstances, have acquired new significance.

This note will consider the practical application of these concepts during the coronavirus pandemic.

Force majeure

Force majeure does not exist as a standalone doctrine but is a category of contractual provision which excuses a party’s performance either entirely or for the duration of a prescribed event.  A well drafted force majeure clause will often provide parties with the cleanest route through difficulties caused by an unforeseen event which prevents performance, such as coronavirus, because of the limitations of other potentially relevant doctrines (e.g. frustration and illegality, addressed below).

There is no established definition of force majeure[1] and the application and effect of a force majeure clause will be a straightforward matter of contractual construction.  The questions which a party will need to consider are typically: firstly, does the present pandemic (or relevant supervening event) satisfy the contractual definition of a force majeure event; and secondly, what effect will the existence of a force majeure event have on the requirement to perform.

As to the first question, there are three broad categories of clause to consider in respect of the coronavirus pandemic:

• firstly, clauses that refer expressly to pandemics as supervening events. Subject to the points made below, such clauses are likely to be engaged in the present circumstances;
• secondly, those relatively detailed clauses that use common or stock phrases which may capture pandemics or their effects. For example, the phrase ‘Act of God’, often appears in force majeure clauses and has been held to mean ‘those events which involved no human agency and which it was not realistically possible for a human to guard against: an accident which the defendant can show is due to natural causes, directly and exclusively, without human intervention …’.[2]  In our view, this is likely to be interpreted as encompassing a pandemic.  However, if a clause is comprehensively drafted but does not use any language which on ordinary construction includes a pandemic, a court will be much less likely to interpret the contract in a way that assists the party asserting force majeure;
• thirdly, those clauses which do not closely define what will be a force majeure event.  Vagueness or generality will not necessarily be fatal to the application of the clause, and the courts will construe force majeure ‘in each case with close attention to the words which precede or follow it, and with due regard to the nature and general terms of the contract.’[3]  Whether a pandemic (or its effects) will satisfy the definition of a  force majeure event absent clear and express language will therefore depend on the language of the clause and the contract as a whole, and is likely to be a question the courts have much opportunity to grapple with over the coming months and years.

Where a force majeure clause is prima facie capable of encompassing a pandemic and its consequences, it will be for the party seeking to claim force majeure to demonstrate that the facts in fact engage the clause.  Whilst a clause that uses less definite language, such as ‘hinder’ or ‘delay’ rather than ‘prevent’ will be applied more sympathetically[4], as a general proposition the courts will construe force majeure clauses restrictively against parties seeking to rely on them (much like exemption clauses).[5]

If a contract does not contain an applicable force majeure clause, the affected party will be left to rely on the doctrines of frustration and illegality.

Frustration

A contract is frustrated and may be discharged when an event takes place after formation of the contract which renders performance impossible because it radically alters the nature of the obligations the parties had assumed when contracting.[6]

To draw an analogy to the coronavirus pandemic, if a betting company had contracted with a television broadcaster to feature a certain number of adverts during the half time break of Premier League matches throughout the month of April, and those games were cancelled as a result of coronavirus, the betting company may be able to successfully argue that the contract was frustrated.  However, if that same betting company had contracted with the television broadcaster to feature the adverts at a particular time on Sunday, immediately after the broadcasts for April football matches had finished, hoping to capitalise on audience spill over, and its contract with the broadcaster made no reference to the football matches, the contracts would be much less likely to be frustrated.

Where the doctrine of frustration is successfully invoked, the contract will be discharged and all future rights and obligations under the contract will fall away.  Parties have some protection against arbitrary and unfair results of contracts discharged in this way through the Law Reform (Frustrated Contracts) Act 1943, which in broad summary seeks to prevent unjust enrichment of the parties by operation of the doctrine.  The Act does not apply to various categories of commercial contracts, and in those cases parties will be able to make a claim for unjust enrichment.

Illegality

The final doctrine which may be relevant in the present circumstances is that of supervening illegality.  This is closely related to the other concepts described above and will operate to discharge a contract where the performance of the contract has become illegal as a matter of law.[7]

The law on illegality is complex and, in many areas, contradictory.[8]  The Supreme Court has tried to address this on a number of occasions, most recently through the majority decision in Patel v Mirza,[9] where it held that when determining contractual illegality:   ‘it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality.’

That dicta provides a useful framework for parties to assess contractual illegality as it relates to coronavirus, the Coronavirus Act 2020 and related delegated legislation.[10]  Before engaging in detailed analysis of the application of the doctrine, the primary question a party will need to consider is: does the illegality prohibit performance of the contract?  Much as with force majeure and frustration, illegality will be of no assistance to a party if is simply renders performance of a contract difficult or uneconomic.

The clearest examples of illegality (albeit so far in other jurisdictions other than this one) are cases where regulations are passed to prohibit the export of certain medical goods or supplies to foreign states.  Such regulations have imposed in various countries recently and if similar regulations were made here, any contracts that British companies had to export protected items would be subject to supervening illegality.

Conclusion

It follows from the above that there are a number of potential avenues open to parties whose contracts, in the teeth of the present pandemic, no longer provide any commercial benefit.  The clearest of these routes will be application of agreed force majeure clauses, and we would expect that, of the different concepts discussed in this note, force majeure will be the most heavily relied on in litigation relating to coronavirus and its effects.

If force majeure protection is not available to parties, they may be able to excuse performance through either the doctrine of frustration or illegality, but these paths are much narrower, requiring that the pandemic has an effect which strikes at the root of the contract and is not merely collateral to it. The consequences of the strict application of these principles may seem arbitrary, unfair, and perhaps estranged from the commercial reality of the contract.

Finally, when seeking to rely on these concepts, parties will almost always be expected to react quickly to changing circumstances and to take what steps are available to minimise the impact of the pandemic on their ability to perform.  Delay or acquiescence will very often be fatal.

Tom, Joel and Duncan are Junior Counsel in the Commercial Dispute Resolution Team at Exchange Chambers in Manchester, Leeds and Liverpool

[1] Per Donaldson J: ‘the precise meaning of this term, if it has one, has eluded lawyers for years’ (Thomas Borthwick (Glasgow) Ltd v Faure Fairclough Ltd [1968] 1 Lloyd’s Rep. 71)

[2]Transco Plc v Stockport Metropolitan Borough Council [2004] 2 A.C. 1

[3] Lebeaupin v Richard Crispin and Co [1920] 2 K.B. 714.  However, it is worth noting that excessively vague wording can defeat the clause, such that the phrase ‘the usual force majeure clauses to apply’ was been held void for uncertainty (British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 W.L.R. 280).

[4] ‘Hinder’ carries significantly more latitude than ‘prevent’ (see Navrom v Callitsis Ship Management SA [1988] 2 Lloyd’s Rep. 416 for detailed discussion on its width).  Whilst increases in price alone won’t constitute hindrance, the imposition of executive restrictions, or the impact of war on the supply of available ships, have been held to be hindrances.  Similarly, ‘…to place a merchant in the position of being unable to deliver unless he dislocates his business and breaks his contracts in order to fulfil one surely hinders delivery’.

‘Delay’ bears its usual meaning and is (perhaps self-evidently) not be understood as equivalent to prevention (Fairclough Dodd & Sons Ltd v J.H. Vantol Ltd [1957] 1 W.L.R. 136).

[5] Indeed, whether or not force majeure clauses amount to a form of exemption clause is something discussed regularly in the case law, see e.g. Christopher Clarke J in SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Inc, [2006] 1 Lloyd’s Rep. 163 and Thomas J in The Solon [2000] 1 Lloyd’s Rep. 292.

[6] See e.g. Davis Contractors Ltd v Fareham UDC [1956] AC 696

[7] Typically, this will be a matter of English law, but there will be many cases in which the question whether there is supervening illegality will turn on the effect of a foreign law.  In broad summary, where English law governs the contract, the question will be determined by application of the principles outlined in this section.

[8] In consequence of this fact, and given available space, this note necessarily contains a very high-level review of the law of illegality and its application to the present pandemic.  Detailed consideration of the authorities must be carried out when faced with possible supervening illegality.

[9] [2016] UKSC 42

[10] We note that there is some uncertainty about the general applicability of the approach laid out in Patel v Mirza and, in particular, whether its reasoning should be confined to cases relating to unjust enrichment.  To our minds that would be an overly prescriptive way of reading the judgment, and we expect that it will be widely followed as case law on the topic develops.